The future of Bitcoin: People and algorithms are different after all

It all started on October 31, 2008, when Satoshi Nakamoto had an ambitious idea. He proposed to establish an electronic transfer system that does not rely solely on trust between people. However, the many difficulties that Bitcoin faced in the future, especially the negative perception of consumers, were caused by its characteristic of not relying on interpersonal trust as a pillar. Although the continuous improvement of the technology behind Bitcoin has continuously improved its already strong security, a large number of consumers who have a negative perception of Bitcoin still seize on the behavior of individual Bitcoin users who violated their fiduciary responsibilities, further corrupting the overall image of Bitcoin and affecting its relationship with users.

The negative impact on the Bitcoin industry mainly comes from the media and public opinion. Unfortunately, although entrepreneurs and speculative capitalists are very optimistic about the development of this field, public opinion and the media still focus more on the negative reports of this industry. Headlines such as scammers using this technology to conduct illegal transactions tend to appear more in the newspapers.

For example, Wired magazine published a report titled "Mt. Gox Insider Reveals, Bitcoin Collapse of 460 Million". "Bitcoin Ponzi Scheme - Texas Man Charged with Illegal Fundraising" became the headline of the Wall Street Journal in June last year. In addition, other large and small media have also published similar headlines, such as "Ross Ulbricht, the Operator of the Online Black Market Silk Road, the 'Dread Pirate', was Indicted" (Bloomberg News, February 4, 2015), "Two Former Federal Agents were Charged with Stealing Bitcoins During the Search of 'Silk Road'" (CNN, March 30, 2015), "Board Member Olivier Janssens Reveals the Unbearable Truth of the Bitcoin Fund" (CoinTelegraph, April 5, 2015)

Such headlines are often sensational, not only leaving the public with a negative impression of Bitcoin, but also discouraging potential investors from investing in this industry.

Reduce industry risks and rebuild market confidence

Although Bitcoin technology can theoretically minimize the risks of electronic transfers, the reality of the Bitcoin industry and market is far from ideal. To a large extent, the prosperity of this field is closely related to the self-discipline of the participants.

Generally speaking, when a new technology thrives, experts in different fields will maintain all aspects of this new technology in different ways to keep it running. The industry centered on Bitcoin is no exception. This industry is growing rapidly following this law. However, as the scale grows, the potential dangers in the Bitcoin user base are gradually emerging, because users who use Bitcoin to commit financial crimes will also increase in proportion to the expansion of the industry.

Although risk is a nightmare that accompanies the Bitcoin industry, the Bitcoin industry can still take action to reduce risk and increase market confidence. In my opinion, the methods are as follows:

1. Establish a professional Bitcoin technical team and support their work in hardware and software. Having a professionally trained Bitcoin system operation team can better demonstrate the professional ability to protect the security of user transactions.

2. Set industry thresholds and ensure the credit level of the user group without reducing opportunities.

3. Establish a core professional competency assessment system.

4. Formulate a series of industry behavior standards, including industry ethics, credit system and international remittance implementation standards

When most people think of Bitcoin’s commercial applications, international remittances are the first thing that comes to mind. To this day, the industry still charges high fees for this service, which provides an opportunity for new companies to enter the industry. They can invest in Bitcoin through loans and impact the current pricing system.

However, price is far from the only factor that international remittance consumers consider. In comparison, the credit of the service provider is often more important. Anyone who has learned some money transmission will be familiar with the Hawala system. This underground cash flow system that has been prevalent in the Middle East, North America and South Asia since the Middle Ages is based on the credit of the intermediary. The intermediary must first trust the system, and the trader must also trust the intermediary he contacts. This trust relies on word of mouth from generation to generation.

Data shows people lack confidence in Bitcoin as a remittance medium

Since the beginning of Bitcoin, the direct interaction between professionals and ordinary consumers has been its biggest challenge. Recent surveys show that only a small number of American consumers are more confident in the credibility of Bitcoin as a medium for international remittances than traditional remittances. This is partly due to the negative media coverage mentioned above.

It is worth mentioning that some consumers do not trust any traditional remittance services. Perhaps the successor can work hard in this regard to expand the market.

My guess is that not only are consumers ignorant of the technology behind Bitcoin, the technology behind traditional international currency flows is also unfamiliar to them.

Putting the postal service aside, international money transfers from the U.S. over the past 40 years have been primarily made using two technologies: wire transfers and ACH (also known as media exchange automated transfers, which are run through ACH institutions outside the U.S.). The main providers of these two services are Western Union and MoneyGram, two long-established companies that are the two major operators in a lucrative but orderly field.

Companies in the sector, including these two, raked in a combined $16 billion from remittances last year, out of a total of $438 billion handled by the World Bank. Their clients are mainly from developing economies. Service fees can be as high as 29% of the remittances.

Let's talk about wire transfers. The Federal Reserve's Society for Worldwide Interbank Financial Telecommunication and the New York Clearing House Interbank Payments System are all capable of providing this service. The advantage of this service is that it can realize real-time transfers between financial institutions and provide account information of both parties at the same time. Although the fee is relatively high, the wire transfer service (as long as the banks of both parties support wire transfers) can still provide a relatively fast remittance experience.

ACH, unlike the newer wire transfer, is based on a mature set of standards established by the Electronic Payments Association forty years ago. Ordinary people are more familiar with ACH because we use this service when we receive our wages or transfer money within our families. Since ACH transfer requests are processed in batches rather than individually like wire transfers, its cost is much lower than that of wire transfers. But for the same reason, ACH remittance time is also relatively long: general ACH remittances usually take several business days to arrive. Although many private financial institutions have tried to shorten ACH remittance time and further reduce its costs, they have achieved little success. After all, the mature technology and operating model behind ACH are difficult to be further improved.

In contrast, Bitcoin technology is more advanced. This emerging system builds an open ledger based on a cryptographic block chain and uses a decentralized rather than centralized computer group to confirm transactions. These computers, which Bitcoiners call mining machines, compete with each other for the right to confirm transactions by solving mathematical problems and receive corresponding rewards after the verification. With the huge computing power of a large number of decentralized third-party computer groups, a transaction can be confirmed in about ten minutes, and the transaction cost of the Bitcoin system is negligible for both parties to the transfer.

Consumers weigh the benefits of technology against interpersonal trust

No matter how exciting and cutting-edge computer science breakthroughs may be, consumers won't care. They won't consider the technical differences between ACH and wire transfers, or even consciously distinguish between wire transfer services. And I also don't think consumers will bother to figure out what sorting system the postal service uses to deliver cash packages.

Consumers are more concerned about the benefits of each specific technology and whether the people who transfer cash can be trusted to handle their hard-earned money. At least for me, every time I go to a shabby Western Union store, I can't help but worry that my cash will go wrong, so I often touch my pocket to make sure that my cash has not disappeared.

The terms and conditions in these remittance company contracts are so complicated that even the lengthy safety clauses of extreme sports pale in comparison. In fact, people do not distrust the technology used by remittance companies, but they just don’t trust

Employees at remittance companies who use these technologies and have access to cash transfers (I also think they don’t trust the lawyers who write those long fine print terms either).

People and algorithms are different after all

However, data shows that those who are closely associated with Bitcoin, or in other words, the small group of Bitcoin users who have attracted most of the media attention in the past two years, are beginning to distrust the Bitcoin system.

The Bitcoin community has begun to recognize this obstacle and has taken some countermeasures: either they have launched a PR campaign to restore confidence in Bitcoin, or they have completely removed Bitcoin from their marketing strategy and brand image, or they have ensured that Bitcoin is not associated with the beneficiaries of remittance services, especially not used in the final few critical steps of the remittance application. These countermeasures are reasonable, but they are not enough to overcome this obstacle.

I personally have full confidence in the future of Bitcoin: with the emergence of new technologies in the financial industry represented by Bitcoin, the transparency of future remittance services and the protection of consumers will be much stronger than the traditional financial system. However, today's consumers still prefer to transfer funds through reputable physical remittance service providers. If the traditional professional remittance network can be organically combined with the new era of Bitcoin technology, then Bitcoin can well reduce the human risks in traditional financial services, and the good reputation of physical remittance service providers can also make consumers more widely accept Bitcoin technology.

When Satoshi Nakamoto introduced Bitcoin to the market, he described it as a technology that is "completely decentralized and does not require the support of a central server of a trusted party" because Bitcoin technology is "completely based on cryptographic proof rather than trust between people." However, unlike the Bitcoin network, financial practitioners who run businesses and actively engage with customers are just normal humans with an emotional side - and people and algorithms are different after all.